Often called an Executive Bonus plan, a Section 162 plan involves the purchase of a life insurance policy on the life of one or more employer-chosen employees. The employer pays premiums on the policy but charges the employee with a bonus in an amount equal to that payment.
The employee (or the third party such as an irrevocable trust designated by the employee) purchases and owns the policy and names the beneficiary. The policy owner has all rights in the policy. The corporation never has any right to any part of the policy cash values, dividends, or death benefits and at no time does the corporation own any incident of ownership in the policy.
The arrangement is called a Section 162 plan because the corporation will take an income tax deduction under Internal Revenue Code section 162 for the amount of the bonus charged to the covered employee.2 In some cases the corporation will pay premiums directly to the insurer while in other situations the corporation will actually pay the money to the employee or a trust for the payment to the insurer.
Usually, the bonus paid by the employer is the same as the premium on the selected policy but in some cases, to increase retirement and death benefits, employees will choose to add their own after-tax contributions to increase the premium amount.
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Reproduced with permission. Copyright The National Underwriter Co. Division of ALM